May 4, 2018 at 5:00 am ET
A common argument from health care price control advocates is that there is a significant price differential for health care services between the U.S. and other developed countries, and that these differences drive higher per capita spending in the U.S. versus developed countries. According to the World Bank, developed countries are the ones with the highest gross national income. The top six GNI per capita countries are Switzerland, Norway, Luxembourg, Macao SAR/China, Denmark and the United States.
So is this argument correct? While the simple answer may be “yes” to the question of whether health care services are higher in the U.S. than in other developed countries, there are other factors that need to be considered in order to fully understand why these differences exist.
Several factors can influence how much a nation spends on health care, including overall utilization of services and technology, types of professionals used to deliver care, the use of biopharmaceuticals to offset more expensive health care services, and the underlying health status of the population. These and other influencers can have a direct impact on a country’s health care spending patterns.
More importantly, in order to do an appropriate price comparison, several dynamics ought to be considered.
First, the list price for a medicine in the U.S. is not the net price paid by either the government or private payers. The net price that is actually paid reflects the rebates and discounts provided to entities such as insurers or pharmacy benefit managers.
In addition, biopharmaceutical companies pay fees to these same entities for the purposes of handling such tasks as formulary and utilization management. According to the Berkeley Research Group, in 2015, 42 percent of gross expenditures for biopharmaceuticals at the retail level go to these so-called “middlemen.” Simply looking at U.S. list prices against prices in other countries is not an accurate comparison.
Next, one needs to take into consideration the impact of medical inflation on prices of all health care services and goods in the U.S., not just certain parts of it. For example, a study published in JAMA by Irene Papanicolas and colleagues in April 2018 found that generalist physician salaries are 30-60 percent higher in the U.S. than in other developed countries.
Most recently, it has also been recognized that perhaps the health care system is burdened by artificially inflated costs through unequitable biopharmaceutical pricing or inadequate intellectual property protection in developed countries.
Through negotiation of trade agreements with developed countries, the U.S. needs to ensure that such agreements reflect strong IP protection and enforcement provisions. Biopharmaceuticals also need to be adequately priced by developed countries so that the burden of pharmaceutical prices that prominently support innovation is not borne solely by the U.S. consumers.
The Council of Economic Advisors in a report earlier this year, entitled “Reforming Biopharmaceutical Pricing at Home and Abroad,” stated: “The United States both conducts and finances much of the biopharmaceutical innovation that the world depends on, allowing foreign governments to enjoy bargain prices for such innovations. This indicates that our current policies are neither wise nor just.”
In another report, entitled “The Global Burden of Medical Innovation,” researchers from the Schaeffer Center at the University of Southern California found that “using a previously published economic-demographic microsimulation, we estimate that if European prices were 20 percent higher, the resulting increased innovation would generate $10 trillion in welfare gains for Americans, and $7.5 trillion for Europeans over the next 50 years. Encouraging other wealthy countries to shoulder more of the burden of drug discovery — including higher prices for innovative treatments — would ultimately benefit patients in the United States and the rest of the world.”
Ultimately, there is an innovation dividend to higher prices in the U.S. for biopharmaceuticals and physician services. For example, from the JAMA article referenced earlier, while the U.S. and Switzerland have the highest per capita spending for pharmaceuticals, they also lead all developed countries in the discovery of new medicines — 111 and 26 new chemical entities discovered, respectively, during the study period. In fact, the U.S. was responsible for 57 percent of total production of new chemical entities.
Regarding the variance in physician salaries, it is important to note that in the U.S., physicians face extraordinary financial burdens that their peers don’t face in other developed countries, such as the cost of insuring against medical malpractice. In addition, the U.S. has the highest levels of administrative burden. For example, according to a 2014 study published in BMC Health Services Research by Aliya Jiwani et al., billing and insurance-related activities add an additional $70 billion to physician practice expenses.
We can only do an honest comparison of health care prices and spending between the U.S. and other developed countries when we consider the rate of overall medical inflation, burdensome administrative practices bestowed upon the U.S. system, estimation of the net cost, consequences of weak IP protection and enforcement, and imbalanced pricing policies by developed countries. Only then will we know if there are truly differences in prices and spending amongst developed countries.
Without that analysis, we may end up doing more harm than good by imposing ill-considered policy changes that are supported by rhetoric, not reality.
Robert Popovian is the vice president of Pfizer U.S. Government Relations.
Morning Consult welcomes op-ed submissions on policy, politics and business strategy in our coverage areas. Updated submission guidelines can be found here.